Nokia Accelerates AI Infrastructure Growth Targets as Hyperscaler Demand Surges Beyond Expectations
Q1 2026 Earnings Call, April 23, 2026
Nokia delivered a solid first quarter with net sales up 4% to EUR 4.5 billion while simultaneously raising its growth expectations for the year, driven by accelerating demand from AI and cloud customers. The company now expects its AI and cloud addressable market to grow at a 27% CAGR between 2025 and 2028, up substantially from the 16% forecast provided just five months ago at its Capital Markets Day in November. This dramatic upgrade reflects how quickly hyperscaler infrastructure spending has escalated, with expectations for the largest players now exceeding $700 billion in 2026 CapEx, up from $540 billion anticipated last year.
The momentum translated into EUR 1 billion in new orders from AI and cloud customers during the quarter, with book-to-bill above 1 at the group level and well above 1 in Network Infrastructure. CEO Justin Hotard emphasized the company's focus on "maximizing the growth opportunity in front of us" as the company navigates what management characterizes as a structural, multi-year shift in network demand driven by AI workloads.
Network Infrastructure Growth Targets Jump on Supply Confidence and Design Wins
The most significant development was Nokia's decision to raise its Network Infrastructure growth assumption for 2026 to 12% to 14%, up from the prior 6% to 8% guidance. More specifically, the company now targets 18% to 20% growth for Optical and IP Networks combined, up from the previous 10% to 12% outlook. Hotard attributed the upgrade to "a little bit more confidence on supply" across optical subsystems, DSPs, and pluggables, as well as "some of the traction we're starting to see in IP networking."
The supply confidence extends beyond just the company's own manufacturing capacity. Nokia's second indium phosphide fab in San Jose, California remains on track to begin ramping production later this year, though CFO Marco Wiren noted that "Fab 2 is a fraction of the ramp for '26, it's much more material to the longer term." The company is working across the entire supply chain to scale production capability, with Wiren acknowledging that "the whole supply chain is doing the same as well to secure that we actually can capture those demand opportunities."
On the IP networking side, management reported securing several design wins in switching and routing during the first quarter, though these have not yet translated meaningfully into orders. Hotard explained that the IP business is "more design win driven" with longer sales cycles, but expects "some of that start to flow in, in Q2." When asked about the company's previously stated ambition to grow the switching business by approximately EUR 1 billion into hyperscale opportunities, Hotard confirmed strong progress but declined to provide specific dimensioning, noting only that the design win footprint is "certainly broader based on what we see today than it was a year ago."
Optical Networks Drives Performance with 20% Growth and Margin Expansion
Optical Networks delivered 20% sales growth in the quarter, primarily driven by AI and cloud customers but also benefiting from telecom operators investing to meet increasing demands on transport networks. The business demonstrated the early benefits of the Infinera acquisition, with gross margin in Network Infrastructure expanding 150 basis points to 43.4%. Management noted the increase was "driven by a higher gross margin in Optical Networks, benefiting mainly from Infinera integration synergies and scale."
The integration continues to exceed management's expectations. Wiren stated the company is "tracking extremely well" and "actually ahead of our targets when it comes to synergy captures." Nokia had originally guided to EUR 200 million in synergies over three years from closing, and management indicated the company is now tracking "somewhat better than that" with synergy benefits already visible in quarterly results. The company maintains its target of double-digit operating margins for the Optical business despite increased investment spending this year.
At OFC in March, Nokia introduced several products reflecting accelerated innovation post-Infinera. The company launched a next-generation hyperscale multi-rail solution that will ship later this year, delivering an 8x increase in density and 25% greater density than recently announced competing products. More significantly, Nokia revealed a new building block architecture with four optical engines embedded across 13 application-optimized solutions, compared to two engines per generation previously. This architecture promises customers up to 70% reduction in total cost of ownership. Products will sample in first half 2027 with volume shipments in the second half.
Hotard emphasized that the new roadmap "was designed with a real focus on AI and cloud customers and designed in collaboration with some of those customers," highlighting the company's deepening partnerships with hyperscalers. When pressed on the lack of public customer announcements despite strong order momentum, Hotard stated bluntly: "From my perspective, that's not my priority. My priority is making sure we're partnering with them effectively, we're delivering what they need, and we're helping them execute on their strategies."
Lead Times Extend as Industry Navigates Capacity Constraints
Nokia is experiencing order elongation as customers seek longer-term commitments amid tight supply across the semiconductor ecosystem. Hotard characterized lead times in Optical as "12 to 18 months" currently, adding that "you've heard other peers in the industry talk or some of the players, the ecosystem peers, talk about being sold out over multiple years. I think that's probably a pretty good indication of where we see the Optical side." The CEO views the elongation as "a net positive because I think it's tied to the underlying demand for the products, and it helps us with predictability and capacity planning."
All orders reported by Nokia represent firm purchase orders with delivery dates, not framework agreements or long-term commitments without specific timing. Hotard clarified that while the company maintains multiyear frame agreements with both telco and cloud customers, "the only thing you see in orders is firm purchase orders with delivery dates."
Book-to-bill for AI and cloud customers reached approximately 3 in the quarter, though management emphasized the focus remains on maximizing opportunity capture rather than viewing the elevated ratio as something requiring catch-up. Supply constraints persist across multiple areas, with Hotard noting "there's a fair amount of constraint in the semiconductor ecosystem in general" and adding that scaling indium phosphide production at industry levels is "driving demand back into the supply chain that we need to build capacity for."
Mobile Infrastructure Shows Progress Despite Flat Market
The newly formed Mobile Infrastructure segment, which began operating in January, delivered 3% net sales growth with an 8.9% operating margin, up 380 basis points year-over-year. The improvement primarily reflected the absence of a EUR 120 million contract settlement that negatively impacted the prior year, though lower operating expenses from ongoing cost-saving programs also contributed. Gross margin reached 48.5%, in line with the company's long-term target for the segment.
Core software continued its momentum with 5% growth and market share gains, delivering six competitive swaps during the quarter. Hotard noted that "customers are modernizing their platforms with cloud-native solutions, adopting new security features and driving end-to-end automation with a focus on reducing operating expenses." Radio Networks sales were flat but met expectations, with notable wins including Virgin Media O2.
At Mobile World Congress, Nokia introduced a new generation of Doksuri remote radio heads that deliver 30% improvement in power efficiency and up to 25% reduction in weight, marketed as AI RAN ready. The company's AI RAN partnership with NVIDIA continues progressing toward field trials by year-end, a milestone Hotard characterized as significant for the business's strategic evolution. He framed the opportunity candidly: "What I'm very pleased about right now is that the AI-RAN trials and the engagement around a model that will fundamentally be different for the baseband because we'll start to detach software innovation, and what I mean by that is not just features, but actual performance enhancements from the underlying hardware."
Hotard reiterated that the focus for Mobile Infrastructure is not necessarily growth given flat underlying markets, but rather improving profitability and return on invested capital. Technology Standards grew 10% due to several consumer electronics and multimedia deals contributing catch-up sales, though this business is expected to remain largely flat for the full year.
Fixed Networks Faces Near-Term Headwinds from Portfolio Discipline
Fixed Networks declined 13% in the quarter, reflecting Nokia's deliberate portfolio strategy to focus on higher-margin products. Sales of optical line terminal products remained largely stable, but the company is exercising increased discipline in the consumer premise equipment fiber business that it no longer views as strategic in all applications. Hotard acknowledged "we expect that we'll continue to have some headwind on the CPE side as we become more disciplined in that space and focus on the areas where it's valued."
Despite the near-term pressure, management expressed confidence in the business's fundamentals. The U.S. market remains supportive with fiber deployments a key investment focus for Tier 1 operators, and Nokia is pursuing opportunities in data center applications. At OFC, the company launched an out-of-band management solution oriented toward data center use cases. Hotard characterized the current period as "a very intentional transition to making sure the business has a long-term sustainable growth profile, not just in top line, but more importantly, in gross margin and operating profit."
Investment Spending Rises as Company Scales for Structural Opportunity
Despite raising growth expectations substantially, Nokia maintained its full-year comparable operating profit guidance range of EUR 2 billion to EUR 2.5 billion, though management indicated the company is currently tracking "somewhat above the midpoint of the range." The unchanged guidance reflects increased investment spending to capture the expanding opportunity, with expenses spanning R&D, sales and marketing, and production capabilities.
Hotard explained the investment rationale: "If you just think about what's happening in this part of the business, particularly around Optical, we're also going through a massive step function in volume as an industry. And so that means that we actually have to do work to mature the supply chain, mature the production capability as an industry, and we're not immune to that. So we're investing to make sure that we're successful in that and that we can capture the fullness of the opportunity around us."
The company expects Network Infrastructure operating margin to increase slightly for the full year, though Hotard emphasized that "our focus this year is on investing to capture the long-term growth opportunity in the market." For second quarter, Nokia guided to 5% to 9% sequential net sales growth with operating profit expected to represent 12% to 16% of the full year, implying first half will account for 24% to 28% of annual operating profit, consistent with 2025 phasing.
Wiren noted that gross margins in Mobile Infrastructure will be "somewhat weaker" in the second and third quarters before strengthening significantly in the fourth quarter, consistent with typical business seasonality. The company also flagged that second quarter typically sees lower cash generation due to annual employee incentive payments.
Structural Market Shift Driven by Evolution Toward Agentic and Physical AI
Management's conviction in the durability of the AI infrastructure cycle has strengthened considerably. Hotard outlined how AI-driven traffic currently represents approximately 20% of total network traffic, roughly 80 exabytes per month, and remains primarily human-to-machine interactions. He described the coming transition: "As we move deeper into agentic AI adoption and ultimately physical AI adoption, machine-to-machine traffic will become the primary driver of traffic, and that will lead to a step change in network traffic."
This demand is already manifesting in AI factories for data center interconnect and inside data centers for routing and switching, but is "increasingly also driving demand in transport networks across metro and long haul." Nokia views this as "a structural shift in the market, which will sustain for multiple years," leading to the upgraded addressable market outlook that now implies network infrastructure growing at a 14% CAGR compared to 9% previously expected.
The company delivered EUR 629 million in free cash flow during the quarter with typical working capital unwind from the receivables buildup in the strong fourth quarter of 2025. Nokia ended the period with EUR 3.8 billion in net cash. Management expressed confidence in maintaining a strong cash position to support R&D investment as the first capital allocation priority, with inorganic investments, dividends, and potential share buybacks following in that order.
Across customer segments, AI and Cloud grew 49%, Mission-critical Enterprise and Defense grew 19%, and Technology Licensing grew 10%, offsetting a 2% decline in telecom to deliver 4% group growth. The telecom decline was partly attributable to Fixed Networks portfolio decisions, with the underlying telecom market remaining relatively flat as expected.
Nokia Oyj Deep Dive
Business Model and Monetization Architecture
Nokia generates the bulk of its EUR 19.9 billion in annual revenue through the design, manufacture, and deployment of telecommunications infrastructure, supplemented by a highly lucrative intellectual property licensing business. Entering 2026, the company radically simplified its operating model, collapsing four legacy business groups into two primary segments: Network Infrastructure and Mobile Infrastructure. This architectural pivot is designed to capture the capital expenditure supercycle driven by artificial intelligence and cloud computing. The Network Infrastructure division, now Nokia's primary growth engine, encompasses optical networks, IP routing, and fixed networks. The Mobile Infrastructure division consolidates the core software, radio networks, and the high-margin patent licensing unit formerly known as Nokia Technologies. Monetization is achieved through hardware sales, recurring software subscriptions, and long-term service contracts. Additionally, Nokia maintains a rigorous capital allocation framework, explicitly segregating non-core assets such as microwave radio and fixed wireless access into a dedicated portfolio business unit to assess for future divestiture or restructuring, effectively shielding the core operating margin.
Customers, Competitors, and Supply Chain
The customer base is undergoing a pronounced bifurcation. Historically reliant on traditional telecommunications operators such as Deutsche Telekom, Vodafone, and T-Mobile, Nokia is now pivoting aggressively toward hyperscale cloud providers and mission-critical enterprise customers. Orders from artificial intelligence and cloud clients reached EUR 2.4 billion in 2025, validating this strategic realignment. On the competitive front, the global radio access network market operates as a fierce oligopoly. Nokia's primary Western rival is Ericsson, while Huawei and ZTE dominate the Asian landscape and select emerging markets. Samsung serves as a distant, yet persistent, fifth player. Nokia's supply chain strategy is increasingly focused on vertical integration to protect component margins and guarantee supply in high-growth segments. This is evidenced by the company's investment in a new Indium Phosphide fabrication facility slated to ramp production in 2027, ensuring captive supply of advanced optical components crucial for data center interconnectivity.
Market Share and Industry Dynamics
The radio access network industry experienced a severe contraction between 2022 and 2024, shedding roughly a fifth of its total market value before demonstrating clear stabilization in late 2025. Market share concentration has reached a ten-year high, with the top five vendors controlling 96% of global revenue. Huawei and Ericsson maintain a tight grip, collectively commanding nearly two-thirds of the market. However, Nokia successfully gained ground over the course of 2025, particularly outside of North America. This geographic shift was largely a necessary recalibration following the late 2023 loss of a multi-billion dollar modernization contract with AT&T to Ericsson. Looking forward, the traditional telecommunications capital expenditure environment remains largely flat. Aggregate radio access network spending is projected to show minimal growth through 2026, with the industry essentially in a holding pattern until the preliminary commercialization of 6G networks around the end of the decade. Consequently, top-line growth is heavily dependent on adjacency markets, specifically the intersection of telecommunications and data center infrastructure.
Competitive Advantages
Nokia's competitive moat is anchored by its formidable research and development scale, evidenced by an annual expenditure of EUR 4.9 billion in 2025. This relentless investment prioritizes long-term technology leadership over short-term margin maximization, allowing the company to pioneer artificial intelligence-native network architectures. A critical advantage resides in its optical networking portfolio, which was significantly fortified by the EUR 2.5 billion acquisition of Infinera. This integration positions Nokia uniquely to address the explosive demand for 800-gigabit pluggable optics required by hyperscalers. Furthermore, the company benefits from a robust intellectual property portfolio that acts as a structural cash flow generator, underpinning the firm's EUR 1.5 billion in free cash flow and a healthy 72% free cash flow conversion rate. Additionally, Nokia has cultivated strategic geopolitical capital. As Western governments continue to restrict the deployment of Chinese equipment from Huawei and ZTE in critical infrastructure, Nokia and Ericsson operate in a de facto duopoly across North America and Western Europe, guaranteeing a baseline of recurring upgrade and maintenance revenues.
New Products and Disruptive Entrants
The industry faces disruption from the Open Radio Access Network movement, a framework designed to disaggregate hardware and software to allow interoperability among multiple vendors. While originally conceived to lower barriers to entry and stimulate competition, Open RAN adoption has yielded mixed results. Disruptive entrants such as Mavenir have struggled with the financial realities of scaling, eventually restructuring debt and pivoting toward niche deployments, while Fujitsu's 1Finity has secured only localized traction. Ironically, incumbent vendors have co-opted the open standard. Nokia's strategic response involves fully embracing the architecture while out-innovating smaller players. The company has introduced AI-RAN ready baseband units, such as the Doksuri radio lineup, which embed artificial intelligence inference directly into the compute layer for real-time network optimization. Bolstered by a USD 1 billion strategic partnership with NVIDIA, Nokia is transitioning the cellular network from a static connectivity pipe into a distributed computational grid, creating new hardware replacement cycles tied to artificial intelligence rather than simple bandwidth upgrades.
Management and Strategic Pivot
Nokia is currently executing one of the most definitive management transitions in its modern history. Former Chief Executive Officer Pekka Lundmark, who orchestrated the company's 5G turnaround and margin repair starting in 2020, stepped down in early 2025. Under Lundmark, Nokia stabilized its technological footprint but faced the stark reality of a stagnant telecommunications market and the high-profile AT&T contract loss. On April 1, 2025, the Board installed Justin Hotard as the new Chief Executive Officer. Hotard's pedigree, having previously run Intel's Data Center and Artificial Intelligence Group, sends an unequivocal signal to the market: Nokia's future lies beyond traditional telecommunications. Management's forward guidance targets an operating profit of EUR 2.0 to 2.5 billion for 2026, climbing to a range of EUR 2.7 to 3.2 billion by 2028. Hotard's mandate is to aggressively integrate the Infinera acquisition, expand margins in the Network Infrastructure segment toward 17%, and effectively reposition Nokia as a foundational infrastructure provider for the global data center build-out.
The Scorecard
Nokia stands at a critical inflection point, transitioning from a legacy telecommunications equipment supplier to an infrastructure provider for the artificial intelligence supercycle. The structural stagnation of the global radio access network market presents an unavoidable headwind, forcing the company to extract operational efficiencies while contending with heightened market concentration. However, the early signs of the strategic pivot are highly encouraging. The robust 17% growth in the optical networking division, the EUR 2.4 billion in cloud orders, and the seamless integration of Infinera demonstrate that Nokia possesses the right product portfolio to capitalize on hyperscaler demand. The company's massive research and development engine and strategic partnership with NVIDIA provide a credible roadmap to dominate the emerging AI-RAN architecture.
The leadership transition from Pekka Lundmark to Justin Hotard is arguably the most significant catalyst for the firm's medium-term trajectory. Hotard's deep data center expertise perfectly aligns with the newly streamlined operating model, stripping away the distraction of sub-scale enterprise units to focus entirely on core and cloud infrastructure. While the loss of the AT&T contract cast a long shadow over 2024, the subsequent recovery in international market share and the stabilization of global capital expenditures indicate the worst of the cyclical downturn has passed. The company's ability to maintain strong free cash flow generation and enforce capital discipline suggests a solid foundation for sustainable margin expansion as the artificial intelligence infrastructure build-out accelerates.